Sentiment Cycle Chart Update
Let's go back to our market road map to see where we are now and what could be next.
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NOTE: I am taking tomorrow off, so the next edition will be Tuesday, May 27th.
Several of you have asked me to update where I think we are on the Sentiment Cycle Chart. The first thing to know is that you need to forget the shape of the chart and focus on the sentiment of it. Let me explain.
I think we came down into Panic in early April and have rallied. I think we are somewhere in the green box. Yes, I know folks will quibble that the S&P has rallied all the way back up to that Subtle warning/overt warning/disbelief area, but that’s why I ask you to forget the shape of the chart.
The rally off of Panic went further than I expected on the S&P I had thought 5700) and Nasdaq, but the sentiment surrounding it has not changed. In fact, if you use a chart of IWM, it looks more like the Sentiment Cycle.
Please note that we spent a good deal of time chopping around in that green box. After the rally we’ve had, I can see that happening; volatility in the month of June. Then perhaps we get another rally, and we come back down. I’m not certain of that timing yet, but when it comes to more upside from here, I am focused on the indicators and they are not supportive of that.
As you know, I think we are intermediate-term overbought (or technically will be by Friday). I have been waiting to see if the indicators have changed, and two days ago, the McClellan Summation Index needed only -700 advancers minus decliners on the NYSE to halt the rise. After the worst breadth day since April 4th on Wednesday, the Summation Index has halted the rise and now needs a net differential of +1500 to keep it from rolling over.
Breadth has been terrific off the low, but it began to stall out in the last several days. I noted yesterday how, with the exception of the S&P, most indexes were back to where they were on May 13th. Now we have the Russell having given up the entire China tariff change rally from almost two weeks ago. I suppose the good news is it closed the gap.
As for the sentiment, as I noted in the comments yesterday, the Investors Intelligence bulls jumped six points to 42.3% and the bears fell to 26.9%. This is the first time there are more bulls than bears in more than two months. That is the change in sentiment I expected would arrive this week.
I do not expect to see such a change in the AAII or NAAIM because their surveys are taken on Wednesday, and we know what happened to the market on Wednesday. But yesterday we also looked at the ten-day moving average of the put/call ratio, which has gotten extremely low in recent days.
Can we rally into the weekend? Sure. But with the Summation Index no longer rising and the overbought condition upon us, it would probably be ‘one more rally’. I still think we are set up to see a pick-up in volatility in June.
